USD/JPY Forecast: Decoding Mixed Signals from BoJ and Fed Commentary

Highlights

• The USD/JPY recovers on Friday, but the week closes with a marginal loss of 0.09% to 146.247.
• Bank of Japan emits mixed signals, fueling investor scrutiny of the future monetary stance.
• Probability of a September Fed hold jumps from 80% to 94%, easing USD/JPY upward pressure.

Friday Overview

On Friday, the USD/JPY gained 0.49%. Reversing a 0.47% loss from Thursday, the USD/JPY ended the week down 0.09% to 146.247. A mixed session saw the USD/JPY slide to a Friday low of 144.439 before rising to a high of 146.293.

Early Simmering of a Bank of Japan Shift from Ultra-Loose

After a choppy end to the week, investors will likely increase focus on the Bank of Japan. Last week, Bank of Japan Board members sent mixed signals vis-à-vis monetary policy goals.

There was a discussion of ending negative rates in early 2024. However, Bank of Japan Governor Ueda previously spoke about the need for wage growth and demand to shift the BoJ policy outlook.

On Tuesday, household spending figures for July will give investors a view of demand. However, weak numbers would support the BoJ plan to maintain ultra-loose over the near term.

There are no economic indicators from Japan or China for investors to consider. The lack of economic indicators will leave Beijing stimulus talk and BoJ Board member commentary to move the dial.

Beijing stimulus and hawkish BoJ commentary would weigh on the USD/JPY pairing.

US Labor Day Holiday Leaves Fed Commentary to Influence

Investor bets on further Fed rate hikes have fallen significantly, easing the threat of a USD/JPY return to 147.

According to the CME WatchTool, the probability of a September Fed hold increased from 80% to 94% over the week. Bets on the Fed standing pat in November and December also rose. The chance of a Fed hold on interest rates in December increased from 44.5% to 61.9% over the week.

There are no US economic indicators because of the US Labor Day holiday. The lack of US economic indicators leaves the USD/JPY in the hands of Fed chatter. After a busy week on the US economic calendar, we expect increased market sensitivity to Fed commentary.

With no FOMC members on the calendar to speak today, investors should monitor the news wires for Fed comments. Hawkish chatter would deliver Fed policy uncertainty.

Immediate Forecast: Dollar on the Back Foot

Monetary policy remains the focal point today. Investors are betting on the BoJ and the Fed remaining in a policy-holding pattern. Central bank commentary that deviates from policy expectations will influence the USD/JPY pair.

USD/JPY Price Action

Daily Chart

The USD/JPY held above support at 144.984 and the 50-day EMA this morning. While bets on further Fed rate hikes have fallen, the US macroeconomic environment supports the USD/JPY.

However, hawkish Bank of Japan commentary would support a fall through support at 144.894. A fall through the support level would give the bears a run at the 50-day EMA.

With the markets betting on the Fed leaving rates unchanged, hawkish Fed chatter would bring resistance at 146.649 into view.

Considering the 59.58 14-Daily RSI reading, the USD/JPY has room to target 147 before hitting overbought territory.

4-Hourly Chart

The USD/JPY remains above the 50-day EMA after the Friday recovery. A hold above the 50-day EMA would support a run at the 146.649 resistance level and 147. Bank of Japan Board member commentary must be dovish to support a breakout session. Hawkish Fed comments would also bring 147 into view.

However, Beijing stimulus and dovish Fed chatter would support a fall through support at 144.894. A fall through the support level would give the bears a look at the 200-day EMA.

The 54.95 14-4H RSI reading gives the USD/JPY room to run before hitting overbought territory.